Minerals & MaterialsWill TangTracy WicaksanaRaymond Wang
Agenda
Industry overview
BHP Billiton
Barrick
Xstrata
Mining Industry Overview
Mining is the extraction of valuable minerals or other geological materials from the earth, from an ore body, vein or (coal) seam.
Financial Structure
Cost Structure Exploration, research and development General operation costs Depreciation, depletion and amortization Interest expenses Other
Revenue Composition Financial activities revenue (ie. Hedging) Mining revenue Interest income revenue
Mining Industry Overview
Risk Factors Development and operation Commodity price Interest rate risk The global financial crisis Foreign exchange rate fluctuations Government and political risks, licenses and permits Health, safety, environmental and accidents Energy Risk Derivative Instrument Risk
Credit risk Market liquidity risk Mark-to-market risk
Others
Gold
Market value
The global gold market grew by 41.1% in 2010 to reach a value of $83.8 billion.
Market value forecast
In 2015, the global gold market is forecast to have a value of $131.5 billion, an increase of 57% since 2010.
The gold market is usually in contango
Over the counter trade (OTC)
Global gold market share: % share, by value, 2010
Global gold market value: $ billion, 2006–10
Market Demand
India (27%), China, and the Middle East accounted for approximately 70% of world demand in 2009.
Market Supply
Alternative Investment
Safe Haven
Generally speaking, when people feel secure, gold prices fall; when people feel insecure, prices rise. This is reflected by the short term demand fluctuation.
Alternative investment to USD (uncertainty)
Price Driver
Increase of gold holding
Global gold mine production declining
Gold sales form the official sector under the Central Bank Gold Agreement (CBGA). Central banks became net buyers of gold in 2010 for the first time in 21 years.
Copper
An Internationally traded commodity
Infinite recyclable life
Prices (Contango): Volatile Cyclical Determined by the major metals exchanges
New York Mercantile Exchange (COMEX) London Metals Exchange (LME) Shanghai Futures Exchange (SHFE0)
Price might also be affected through speculative trading and currency exchange
Copper Price
Copper Demand Factors affecting demand
Global Economic Conditions Instability Decreases Demand (US. and Europe)
Industrialization Increases consumption (China and India) Copper imports by China advanced to a record in
2009, driving global prices up 140 percent.
Global Copper Demand
Copper Consumption
The world’s most abundant and widely distributed fossil fuel
Was the most important source of the world’s primary energy until it was taken over by the oil in the late 1960s
70% of the total world coal production is consumed for electricity generation (Thermal Coal)
Other uses: steel production(Coking Coal), cement manufacturing, and as a liquid fuel
COAL
COAL Consumption
Consumption: •China: 2.7 billion tons•US: 1.02 billion•Worldwide: 6.65 billion tons
COAL Prices
ZINC
Zinc is the 4th most common metal
More than 50 countries around the world mine zinc ore, with the largest producers : Australia, Canada, Peru, and the United States
Mining methods:
-Mined underground: 80% of the world’s zinc
-Mined in open pits: 8% of the world’s zinc
-Combination: 12% of the world’s zinc
Uses of ZINC
ZINC Production
ZINC Prices
Iron Ore
Elemental Iron is ranked 4th in abundance in the earth’s crust and is the major constituent of the Earth’s core
98% of iron ore is used to make steel
Major producers of iron ore include Australia, Brazil, China, Russia and India
Iron Ore
Iron Ore Prices
Company Overview
A global mining, oil and gas company
Based in Melbourne, Australia and with a major management office in London, United Kingdom
The world’s largest mining company measured by revenue
The world’s third-largest company measured by market capitalization
In 2001, Billiton Plc merged with the Broken Hill Proprietary Company Limited(BHP) to form BHP Billiton
Executives
Chairman: Jacques Nasser
After serving as a Director of BHP BillitonSince 2006, he was appointed Chairmanon March 31, 2010
33 year career with Ford
From 1998 to 2001, President and CEO of Ford Motor Company
CEO: Dr. Marius Kloppers
In 2007, he was appointed CEO of BHP Billiton
Before joining Billiton in 1993, he worked with management consultants McKinsey & Co in Netherlands
Operation
Operating in nine businesses:
Petroleum
Aluminum
Base Metals (including Uranium)
Diamonds & Specialty Products
Stainless Steel Materials
Iron Ore
Manganese
Metallurgical Coal
Operation Locations
Production volumes
for this year and the previous 2 years
Operating & Financial review
Financial strength and discipline: A solid “A” credit rating
Capital management priorities are: Reinvest in our extensive pipeline of world-class Ensure a solid balance sheet Return excess capital to shareholders
General Performance
General Performance
General Performance
Consolidated Income Statement
Net Finance Costs
Consolidated Statement of Comprehensive Income
For the year ended 30 June 2011
Consolidated Balance Sheet
Other Financial Assets
Consolidated Balance Sheet
Interest Bearing Liabilities
Other Financial Liabilities
Consolidated Cash Flow
Consolidated Cash Flow
Financial Risk Factors
Commodity price risk
Currency exchange rate risk
Interest rate risk
Counterparty credit risk
Financial Risk Management
The identification and management of risk is central to achieving the corporate objective of delivering long-term value to shareholders
Risk profile for the whole business Covers both operational and strategic risks
Group’s Portfolio Risk Management Strategy
A cash flow at Risk (CFaR) framework
We do not generally believe that active currency and commodity hedging provides long-term benefits to our shareholders.
Risk Management
Financial Risk Management
The strategy, financial instruments are employed in three distinct activities Risk mitigation
Assessment of portfolio CFaR against Board-approved limits
Execution of transaction within approved mandates Economic hedging of commodity sales, operating costs and
debt instruments Measuring and reporting the exposure in customer
commodity contracts and issued debt instruments Executing hedging derivatives to align the total group
exposure to the index target Strategic financial transactions
Exposures managed within value at risk and stop loss limits
Execution of transactions within approved mandates
Interest Rate Risk
Exposed to interest rate risk on its outstanding borrowings and investments from the possibility that changes in interest rates will affect future cash flows or the fair value of fixed interest rate financial instruments
Entered into interest rate swaps and cross currency interest rate swaps to convert most of the centrally managed debt into US dollar floating interest rate exposures.
Interest Rate Risk
Currency Exchange Rate Risk
Exposed to exchange rate transaction risk on foreign currency sales and purchases (currency hedging) Translational exposure in respect of non-functional currency
monetary items Transactional exposure in respect of non-functional currency
expenditure and revenues
Currency Exchange Rate Risk
Translational exposure in respect of non-functional currency monetary items
Commodity Price Risk
Financial instruments with commodity price risk included in the following tables are those entered into for the following activities: Economic hedging of prices realized commodity contracts Purchased and sales of physical contracts that can be cash-
settled Derivatives embedded within other supply contracts
Commodity Price Risk
Commodity Price Risk
Commodity Price Risk
Provisionally priced commodity sales contracts Provisional pricing mechanisms embedded within these sales
arrangements have the character of a commodity derivative and are carried at fair value as part of trade receivables.
Liquidity Risk
Arises from the possibility that it may not e able to settle or meet its obligations as they fall due
Additional liquidity risk arises on debt related derivatives due to the possibility that a market for derivatives might not exist in some circumstances
Moody’s Investors service: Long-term credit rating of A1
Standard & Poor’s: Long-term credit rating of A+
Maturity Profile of Financial Liabilities
The maturity profile of the Group’s financial liabilities based on the contractual amounts, taking into account the derivatives related to debt, is as follows:
Credit Risk
Arises from the non-performance by counterparties of their contractual financial obligations toward the Group.
To manage credit risk: Credit approvals Granting and renewal of counterparty limits and daily
monitoring of exposures against these limits The financial viability of all counterparties is regularly monitored
and assessed
Counterparties Receivables counterparties Payment guarantee counterparties Derivative counterparties Cash investment counterparties
Credit Risk
Industry credit In line with our asset portfolio, the group sells into a diverse
range of industries and customer sectors
Credit Risk
Fair values All financial assets and financial liabilities, other than
derivatives, are initially recognized at the fair value of consideration paid or received, net of transaction costs as appropriate, and subsequently carried at fair value or amortised cost
Derivatives are initially recognized at fair value on the date the contract is entered into and subsequently remeasured at their fair value. This measurement of fair value is principally based on quoted market prices.
Credit Risk
Company Overview
Largest pure gold mining company in the world
Proven and probable mineral reserves of 140 million ounces of gold
Headquarters in Toronto, Ontario
Founded and went public in 1983
Worldwide Operation
Operates in Australia, Africa, North America and South America
A portfolio of 26 operating mines
Stock Price
Executives
Peter Munk Founder & Chairman of the Board Companion of the Order of Canada,
the highest honor for a private citizen.
Aaron Regent Appointed CEO on January 16, 2009 Compensation for 2009 was 21
million
Chartered Accountant
Strategic Move
Retiring Barrick's hedge book Barrick used $3.4-billion of the stock sale
proceeds to buy back all of its fixed-price contracts and the majority of its floating spot price contracts.
From 2004 to 2009, Barrick's hedge book liabilities have more than doubled, rising to $5.6-billion from $1.9 billion.
"I wanted to own gold companies and not companies involved in the hedging business.“
- Charles Oliver, portfolio manager
FINANCIAL AND OPERATING Highlights
The market price of gold is the most significant factor in determining the earnings and cash flow-generating capacity of Barrick’s operations.
Q3 2011 Net Earning increased 52% Cash margins rose 51% to $1,415 per ounce Average Realized Gold Price was $1,743 per ounce Total cash costs of $453 per ounce and net cash costs of
$328 per ounce
Stable Production Sold 5.7 million ounce gold in the past 9 month, with
$10.5 billion revenue
Operation
Production
Consolidated Balance Sheets
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Financial Results
Risk Exposures
Exposure to gold price (commodity price)
Foreign Currency Exchange Rates
Interest Rates Risk
Derivative Risk Credit Risk Market Liquidity Risk Mark-to-Market Risk
License to operate
Project development
Global economic conditions
Hedging Strategies
Objective: The primary objective of our risk management program is to mitigate variability associated with changing market values related to the hedged item.
Actively hedge foreign exchange economic risks and key input commodities, including the fuel hedge provided by Barrick Energy.
providing full leverage of production and reserves/resources to market gold prices.
Gold Leverage Unhedged on all future gold production Meet annual production targets Grow reserve/resource base
Gold Leverage
For a producer who is unhedged against spot gold prices, its gross margin per ounce is said to be leveraged.
For example:- if producer has a cost of $300 per ounce and the spot gold price is $600 then their gross margin is $300.-If spot gold price rises by 10%, then gross margin will rise by 20%; if it decreases by 10% then gross margin will decrease by 20%
WHAT BARRICK DOES TO HEDGE AGAINST THESE RISKS
Interest rate swaps
Foreign currency contracts for non-US expenditures
Commodity hedging for inputs such as diesel, electricity, propane and natural gas, as well as its production outputs for both copper and silver
Summary of Financial Instruments
Hedge Against Interest Rate Risk $200 M USD receive-fixed interest rate swaps
outstanding
Hedge Against Foreign Exchange Risk Been designated against forecasted non-US dollar
denominated expenditures. In total, Barrick has AUD $4,488 million, CAD $364
million, CLP 211 billion and EUR 35 million designated as cash flow hedges of our anticipated operating, administrative, sustaining capital and project capital spend
Foreign currency contracts
Hedge Against Commodity Price Risk
Commodity Contracts Diesel/Propane/Electricity/Natural Gas
In total, we have fuel contracts totaling 3,385 thousand barrels of diesel, 540 thousand barrels of Brent crude, and 8 million gallons of propane designated as cash flow hedges of our anticipated usage of fuels in our operations.
Continue purchase 89M lbs of copper collars, 45M oz. of silver collars (hedge against sale)
Summary of Derivatives at September 30, 2011
Fair Values
Cash Flow on Hedge
Gains(Losses) on Non-hedge Derivatives
xstrata
Company Overview
A global diversified mining group with its headquarters in Zug, Switzerland
The fourth largest diversified mining company, with a market value in excess of $64 billion
Listed on the London and Swiss Stock Exchanges
Recognized as the industry leader in the Dow Jones Sustainability Index for the fourth consecutive year
Operation
Commodity business:
Copper
Coking Coal
Thermal Coal
Ferrochrome
Nickel
Vanadium
Zinc
Location
Financial Highlights
Operating profit up 75% to $7.7 billion during 2009
Record real cost savings of $541 million achieved (3.4% of the cost base), the 9th consecutive year of cost reductions
Strong cash generation of just under $10 billion
Gearing reduced to 15% from 26% and net debt by 38% to $7.6 billion, despite total capital expenditure of $6.1 billion during the year
Operational Highlights
20 major expansions and new mines currently in construction, including 10 projects approved during 2010
Three major new mines successfully commissioned: Nickel Rim South, Goedgevonden, and Blakefield South
20% annual reduction in total recordable injury frequency rate; sector leader in the Dow Jones Sustainability Index for the 4th year running
General Performance
Market Overview
Xstrata’s portfolio of exposures is diversified by commodity, geography, currency, and end-user market
Xstrata’s key competitors are Anglo American plc, BHP Billiton plc, and Rio Tinto plc
Strategy
Consolidated Income Statement
Finance Income
Finance cost
Condensed Interim Consolidated Income Statement
Statement of Comprehensive Income
Consolidated statement of Financial Position
Cont’d
Derivative Financial Assets
Capital and Reserves
Interest-bearing Loans and Borrowings
Capital Market Notes
Derivative Financial Liabilities
Consolidated Cash Flow Statement
Risk Management Philosophy
Risk Management Philosophy
Risks arise from exposures are managed by the Treasury Committee, which operates as a sub-committee of the Executive Committee
The responsibilities of the Treasury Committee include the recommendation of policies to manage financial instrument risks.
These recommendations are reviewed and approve by Board Of Directors and implemented by the Group’s Treasury Department
Derivative Financial Instrument and Hedging
Interest rate swaps
Forward currency contract
Forward commodity contracts
Financial Risk Factors
Commodity price risk
Credit risk
Interest rate risk
Liquidity risk
Foreign currency risk
Political risk
Credit Risk
The major exposure to credit risk is in respect of trade receivables.
The credit quality of the Group’s significant customers is monitored by the Credit Department.
Liquidity risk
The risk that the Group may not be able to settle or meet its obligations on time or at a reasonable price
Utilizing both short and long term cash flow forecast to manage the risk
Using S&P (BBB) and Moody’s (Baa2) to assess the ongoing credit-worthiness
Interest rate risk
The main exposure is the movement in the LIBOR
The Group prefers to borrow and invest at the floating interest rates
Undertaking a fixed rate hedging or interest rate swaps, where the movements in the short term interest rates is more significant
Interest rate risk
Contd
Foreign currency risk
Mitigate the risk by maintaining a diversified portfolio of assets across several different geographies and operating currencies.
Using currency cash flow hedging to reduce short term exposure to fluctuations in the USD against local currencies
Foreign currency risk
Foreign currency risk contd
Commodity Price risk
Affect the operating profit and earnings
The risk is managed by maintaining a diversified portfolio of commodities
The group does not implement a large-scale strategic hedging to reduce costs and maintain low cost.
Commodity Price risk
The Australian and South African operations have entered into coal forwards to hedge prices of future sales of coal. The open forwards and collars commodity contracts as at 31 December 2010 are as follows:
Recommendations
Maintain hedging strategy on both commodity prices and foreign currencies
Access capital and managing cash flow and liquidity requirements
Create hedging strategy to mitigate liquidity risk
Withdrawal option
Liquidity option
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